Inflation, output, and welfare

Ricardo Lagos, Guillaume Rocheteau

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We study the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We consider two pricing mechanisms: ex post bargaining and a notion of competitive pricing. Under bargaining, the equilibrium is generically inefficient and an increase in inflation reduces buyers' search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the efficient allocation, and inflation always reduces welfare, although it can have a positive effect on output for low inflation rates.

    Original languageEnglish (US)
    Pages (from-to)495-522
    Number of pages28
    JournalInternational Economic Review
    Volume46
    Issue number2
    DOIs
    StatePublished - May 2005

    ASJC Scopus subject areas

    • Economics and Econometrics

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